For two years, I've been reporting and writing on Herbalife (HLF). I've been consistent with one message: if nothing else, the company and the multilevel marketing (MLM) industry need to go through a "reset" of their business models, not unlike the kind that rocked for-profit schools.
For Herbalife, that reset is occurring now. Even the company is conceding it's a reset, President Des Walsh said on the earnings call Tuesday that it was a "temporary reset."
This came from a company that, until very recently, said that there was nothing wrong with its existing business model, only to accelerate "changes" over the past three months.
The strategy, it appears, is to water down the model in the face of increased regulatory scrutiny. Herbalife is being investigated by the Federal Trade Commission, which is probing whether it's operating a pyramid scheme. The company has consistently denied that.
Even so, Herbalife is warning that the changes is slowing down its growth. This is evident in its unexpectedly poor third-quarter performance.
How long will this last? Herbalife says the slowdown is a "temporary."
Realistically, this reset is likely just the beginning, especially if the FTC decides to crack down on all multilevel marketers with new operating guidelines. Current guidelines are too ambiguous and arbitrary.
While management is putting a positive spin on the story, saying the "changes" will only help the company prosper, it's unlikely that they really know how all of this will shake out.
After all, the changes are new for them, too. In an industry that relies solely on the constant accelerating growth of sales reps, that growth is now decelerating, as the changes are taking place.
As one friend said, "In my years of following MLM companies, I have learned that when the churn rises and productivity of the promoting distributors fades, it is all but impossible to reverse."
Live by the positive momentum, die by momentum in reverse. The same goes for multi-level marketers as well as stocks. It's a perfect storm when both collide.